Migration as Structural Transformation

Submitted by Shanta Devarajan
On Tue, 12/03/2013

[1] When a poor person moves from a low-productivity job to a higher-productivity one, we usually celebrate. The worker is clearly better off; the hiring firm is no worse off; and it’s good for the economy as a whole. Indeed, development is often described as the process of structural transformation[2], where low-productivity workers (typically in agriculture) move to higher-productivity jobs in manufacturing or services.

But when that same worker happens to cross a national border, we call it “migration” and, instead of celebrating, we start investigating the effects on workers, firms and public finances in the new environment; and on those left behind (the so-called “brain drain”). Instead of promoting structural transformation, we look for policies to manage it.

Even more troubling, many of the statements made about the effects of migration on the receiving and sending countries are based on rhetoric rather than evidence. Thanks to painstaking data work and rigorous research by Michael Clemens[3], Lant Pritchett[4] and my colleagues Manjula Luthria[5], Caglar Ozden[6], and Dilip Ratha[7], among others, we now have a fairly robust picture of the effects of migration:

Not only do migration patterns follow wage differentials, but those differences are huge and growing over time. A worker from Haiti moving to the U.S., or from Ethiopia moving to Italy, could increase his or her earnings seven-fold[8]. No other development intervention can match this 700 percent gain. Nevertheless, the stock of migrants worldwide has grown only slightly faster than world population growth[9].

The gains to the global economy of allowing labor to move to where it is most productive are truly massive—of the order of 100 percent of global GDP[10]. By contrast, freeing up all restrictions to trade will generate gains of the order of 2-3 percent of global GDP.

The effects of migration on the receiving country are positive[11]. While some native workers (who are easily substitutable for migrants) may see their wages decline, most of the economy will see an increase in wages and employment, as migrants perform jobs—such as childcare services—that permit the economy to be more productive (for instance, by allowing both spouses to work outside the home).

Across OECD countries, the fiscal burden of migration is either zero or slightly positive[12], partly because migrants tend to be younger and hence less of a drain on the health-care system.

The effects on the sending country vary depending on whether the migrant is unskilled or highly skilled. If the former, there is generally a gain, since there is a glut of unskilled labor in poor countries and a shortage in rich ones. For skilled workers, there is some evidence that wages of the remaining workers goes down[13], but the effects are too small to justify the hype about the brain drain. The exception may be very small countries, such as those in the Pacific Islands or some in Africa[14]. But even here, there is the possibility of migration “chains”, where skilled people from poorer countries fill the jobs vacated by those leaving to OECD countries. Furthermore, there is growing evidence of a “brain gain,”[15] as the possibility of migrating abroad prompts more people to seek higher education in their own countries.

Independent of the empirical magnitudes, there is an argument against skilled migration that goes as follows: since developing country governments paid for these people’s education, they—and not the receiving country—should get the benefits of their post-graduation services. This argument is fragile. First, it applies equally to those who join the private sector in their own countries. Secondly, if a skilled worker such as a doctor is offered a high-paying position in an OECD country, he or she is part of an internationally mobile workforce. If the source country wants to keep them, they should pay them internationally comparable salaries. The reason they don’t is political: they would have to raise the salaries of all the doctors in the country, including those who are not internationally mobile. You cannot solve this domestic, political problem by restricting migration. Finally, at least one study shows that Nigerian doctors in North America remit more than the cost of their education[16].

In light of all this evidence, why is there so much resistance to migration? Why do so many people try to control migration while embracing structural transformation? Politics cannot be the answer, as the small group of people who are likely to lose—typically recent migrants—are not powerful enough to block such a major gain to society. It cannot be due to racism because migrants (and, increasingly indigenous populations) come from all races. In his recent book[17], Paul Collier suggests that migration may upset the social equilibrium in the receiving country, whereby the current residents are willing to pay for the level of social services in their country, given a particular ethnic mix. Migration will change that mix.

Instead of modeling the effects of migration, future research could usefully model the resistance to migration. This research will probably take us into the area of behavioral economics. We should build the empirical base to test hypotheses such as the one above. And we should design policies that are informed by the research on the resistance to migration, rather than just the effects.